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View Full Version : A very interesting article on PM's and deflation........................



Aggie
6th December 2009, 14:43
I understand what the author is trying to get across. As it pertains to gold so it pertains to silver thus its applicablility here is still relevant IMO.

The deflationist camp is quite certain that cash will be king and that overweighting in PM's will be essentially foolhardy. OTOH the inflationist camp holds the opposite view in that PM's will be one of only few assets capable of providing viable hedge protection during a devaluation of fiat currencies through dilution.

Essentially what the author is conveying is not holding too much of one's eggs whether golden or silver in nature in a single basket. I generally agree with that sentiment as likely most of you do. It falls into the realm of common sense really.

As it turns out in my case I've ended up not by pure calculated design allocating very close to 10% of liquid assets towards PM's (liquid assets to me means foremost outright cash, then the subtiers of checking/savings accounts, interest bearing accounts, stocks, and the like somewhat 'easily' converted to fiat hard currency held in hand.)

The question then becomes (and I understand it's as individually biased as our particular unique financial situations should warrant) what percentage of PM's to overall liquid assets have you allocated? Am I being too conservative at 10% all other factors to consider in this tenuous economy of our's?

If indeed the deflationists turn out to be right and holding cash will be king due to credit contracting to near zero then obviously if you could financially swing it you won't sell PM's at depressed prices to generate cash. (In fact what he is saying is that you'd be better off selling more of those PM holdings now and converting it to cash before it becomes too late.) His further point being that whether an inflationary or deflationary scenario is the main event this country or world experiences that PM's are still principally a long term proposition of protecting one's asset valuations and not necessarily to be relied upon for short term insurance.

That's all well and good and I understand his prudent diversified hedging here. However the one thing that still gnaws at me with regards to the deflationist camp take he expouses is the fact that Bernanke has stated numerous times that the printing press will continue to run and if need be he will 'drop dollars from helicopters' to avoid a deflationary depression - or IOW he will avoid a 1930's remake no matter what it takes. Nothing to date so far has convinced me that the Fed's position on this is going to change until at which time this 'recession' has indeed been reversed. Increasing interest rates before such a recession reversal is confirmed IMO would be economic suicide so I don't believe the Fed will do what they indicated they someday will do as to regards sucking back in excess money any time soon either.

Bottomline due to all the Fed's actions I am leaning more towards the inflation/devaluation camp at this time and the fact that central banks have been buying up physical gold (and presumably silver as well) of late. That being said a 10% PM allocation as I currently hold may end up being too conservative assuming I can afford it. OTOH cash is cash and yet if PM's do tank well then you at least have some cash to buy them with. Double edged swords indeed. I think we all have to learn to handle them proficiently or risk eventually getting sliced up if we don't.

aggie

ps. Scroll down to the bottom of the site to read some piercing comments to say the least about this article.


http://theautomaticearth.blogspot.com/2009/12/december-5-2009-golden-double-edged.html

Katwoman
6th December 2009, 15:18
Give me one good reason why the central bank of nation with trillions of dollars in national debt held primarily by foreign investors would not want to see inflation and I will entertain the notion of deflation impacting PM prices in our life time.

IMHO you should just relax since significant deflation simply ain't gonna happen in this country as this would make it much harder for us to pay off our old debt even if we accrued no new debt ever again and there is not a congressmen alive who would be reelected if they let that happen.

On the contrary inflation is the only viable solution to our economic problems.

Given that Alf Field put the majority of his family wealth in PMs suggests to me that 10% may be a bit prudent. Personally I am comfortable with the notion of having as much as 25% of my wealth in PMs but to each his/her own. I only put money I can afford to lose in the stock market and IMHO so should you. I would park another 50% of my money in rental real estate because everyone needs a place to live, you can evict tenants for nonpayment of rent and even sue them for back rent if necessary, and most importantly the predicted inflation will make it easier to pay off the mortgages down the road. The final 25% would be in cash ready to use buying everything I need before it goes up in price.

aequitas
6th December 2009, 15:32
Deflation really, they more than double the monetary base by exploding bank reserves, expand entitlments, and bailout with huge quantities of money private institutions that were going to fail.

We are in a period of liquidation, everyone is selling to pay bills, individuals and corporations alike, therefore prices are being depressed by a heightened supply of assets.

This is different story altogether than the money they have put in the system, they cannot pull out the money without raising interest rates and crashing the economy. If we did what paul volcker did in the 80's and raised interest rates to 21.5% that means the interest on our national debt would be over 2.4 trillion a year, more than all federal tax revenue. They are trapped in a tunnel and whichever way they try to go will hurt, the difference is that the longer they keep interest rates suppressed the more damage will be realized when the next crash comes.

Do you think China is going to indefinitly finance our phony borrow and spend economy. No, it will be painful in the short term but they must shift to a more domestic economy if they wish to thrive in the future. As the U.S. shifts towards a permanent 1+ trillion dollar deficit we are signing our death sentence, we have sold and are selling massive quantities of short term debt, what happens when they want to cash out, what happens if they even stop buying. The fed will be the last one buying treasures and when that day comes the music will have stopped and anyone posied for deflation will be caught in figurative machine gun fire as bonds collapse and inflation expectations set in.

ryshay
6th December 2009, 15:40
However the one thing that still gnaws at me with regards to the deflationist camp take he expouses is the fact that Bernanke has stated numerous times that the printing press will continue to run and if need be he will 'drop dollars from helicopters' to avoid a deflationary depression - or IOW he will avoid a 1930's remake no matter what it takes. Nothing to date so far has convinced me that the Fed's position on this is going to change until at which time this 'recession' has indeed been reversed. Increasing interest rates before such a recession reversal is confirmed IMO would be economic suicide so I don't believe the Fed will do what they indicated they someday will do as to regards sucking back in excess money any time soon either.

Aggie--this is the whole crux of the inflation/deflation debate. What will the FED do? The FED blew a bubble in the 1990s, and when it burst in 2000 (dot-com bubble), then the FED blew another bubble into real estate. When that bubble burst and we had a credit crisis in late-2008, the FED had to make a choice: 1) allow deflation to destroy the stupid bankers, create high unemployment, and reset the economic system so it could grow again. Or, 2) create inflation which would save the stupid bankers, socialize the banks losses to all Americans, and inflate currency until America's debts are actually payable.

Guess what the FED chose to do? I think you know. The bailouts/stimulus/quant easing is the USGovt and FED acting together to use inflation to counter the credit deflation.

So, the deflationists would be correct. Prechter, Mish, those guys would be right, if the FED were not a part of the equation. Everything Mish and Precther predict would indeed happen, but the FED is now publicly committed to a path of inflation. Bernanke will drop FRNs from helicopters on the cash-starved public if necessary. How much easier is it, then, to add 1s and 0s to the banks balance sheets? Rest assured, the FED will NOT allow a deflationary collapse. They have opted for an inflationary depression. I don't know how inflationary yet--but gold will go up, as it has. Prechter is not an idiot--he just does not appreciate the power and determination of the FED to stop the deflationary pressures hammering away at real estate, residential and commercial.

Now, there may be a short burst of a deflationary scare, similar to Oct 2008, where gold will tank, the dollar will rise. But this will give the USGovt an excuse for stimulus/bailout/quant easing 2.0. Then, gold will stabalize, and start to rise again.

So I am holding my PMs and riding out any future, short-term deflationary scare. Because in Bernanke-I-trust. I trust he will do what he thinks is the right thing--to print FRNs to stave off deflation, while condemning us to an inflationary depression.

So, you see, Bernanke is really powerless to stop the Bust following the booms of 1990-2008. But, he can choose the way the Bust will befall us. He has opted for higher employment, but the wages will not be able to buy very much (due to inflation).